Unjust Enrichment and Creditors

Abstract

This article has been published in The Review of Litigation, v. 27, no. 1 (Fall 2007). It is available online at: http://scholarship.law.cornell.edu/facpub/1/.

The constructive trust remedy plays an important role in bankruptcy because it places restitution claimants in a position of priority over creditors. According to traditional rules governing constructive trusts, restitution claimants who can identify particular assets in the debtor's hands as products of an unjust enrichment recover in full, to the exclusion of other unsecured creditors. The draft Restatement (Third) of Restitution and Unjust Enrichment endorses this outcome with only minor qualifications.

The supposed basis for a constructive trust is unjust enrichment: courts grant the remedy to prevent the defendant from profiting at the claimant's expense. In bankruptcy, the parties who bear the burden of the remedy are the defendant's creditors. Therefore, at least in theory, the relevant question is whether creditors will be enriched by sharing in the assets subject to the claimant's restitution claim.

The draft Restatement recognizes this point, but maintains that in almost all circumstances, creditors will be unjustly enriched if allowed to share in assets subject to a constructive trust claim because the constructive trust claimant is the "equitable" owner of those assets. The debtor's obligations to general creditors should not be paid from someone else's assets.

In this article, I examine the notion of equitable title and conclude that it does not support the conclusion that priority for constructive trust claimants is necessary to prevent unjust enrichment of creditors. The traditional rule of automatic, or near-automatic, priority may nevertheless be sound, but its justifications lie in administrative simplicity and tradition rather than unjust enrichment.